Turning a profit connecting rural Africa

By Frances Rose, Head of EMEA, TowerXchange: Dion Jerling is clearly passionate about technology and about using it to help rural and underserved communities in Africa. Giving up his career in Europe, he has worked for the last ten years on developing solutions which will bring network access to communities across the African continent and enable them to make the most of new services in healthcare, education and commerce. But of course the problem isn’t the ideal – the problem is sustainability, and this means turning a profit from small and underserved populations.

TowerXchange: Can you tell us more about the history behind Connect Africa?

The idea is to use technology to bring services to rural communities. I like tech and enjoy using it and even ten years ago I felt that technology was available to help people in rural and underserved Africa. I grew up in South Africa and I wanted to come back to Africa and make a difference.

Our first idea was to get a satellite payphone in every school in Africa – it proved too expensive back then and a bit idealistic but the research we did on the concept showed that GSM was spreading rapidly across Africa and might be leveraged. This resulted in a mobile service centre in deep rural Limpopo Province that travelled from village to village using a boosted GSM signal from Vodacom, South Africa’s largest MNO. A small area (50m) of full coverage meant that people could come with their own phones or use the Connect Africa JEMBI payphones that we provided to place calls through the Vodacom network. We also offered a scanner, copier, printer and a mini office to service providers and the community. At first we visited villages on a weekly or fortnightly basis but as demand grew we found people needed signal for longer periods of time. We then looked at a trailered response which enabled us to leave the mobile centre site for a day or more. The solution  was easily scalable and local government became interested in using the mobile units to extend their services in rural areas. We got close to signing contacts but an eighteen month delay before contracts could be signed prompted us to escalate our ambition to take the service North, into real Africa. Our satellite partner at the time had a licence in Zambia so we moved in 2009 and have been here ever since.

TowerXchange: How did the market in Zambia differ from South Africa?

South Africa is well covered geographically (upwards of 85%)  so there were few remote communities that didn’t have access to a mobile signal. Zambia has vast areas of zero coverage with distributed small rural communities, a much bigger challenge to cover, particularly when up to 65% of the population live in rural areas. This meant we needed a low cost fixed coverage solution to service rural Zambia. We partnered with MTN Zambia to test a new – lightweight, ‘low-tower, low-power GSM solution’ that used a smaller outdoor BTS requiring only 80 watts of power. The smaller coverage footprint (between three and five kilometers radius) suited Zambia’s small communities.

Our aim is to facilitate the delivery of multiple services to the underserved and we need ICT to be able to do that. This means that extending GSM coverage serves two purposes – it brings mobile coverage to underserved communities and enables us to facilitate the delivery of multiple other development services such as education, health and agriculture support and information.

The MTN relationship was a breakthrough in that we were able to integrate our CORE into the MTN switch and use their microwave backbone to successfully backhaul our test site traffic into the MTN Zambia network.  Typically VSAT is used to backhaul deep rural sites so our future deployments have been designed for VSAT backhaul.

With two of Africa’s leading mobile networks (Vodacom and MTN) in two different countries we were able to prove both the concept and that the technology works - but to date there is still no large scale commercial roll-out of rural coverage.

The commercialisation of rural solutions with the Tier 1 operators is proving a surprising challenge.

TowerXchange: How easy is it to monetise these rural areas?

Our business model was built around around three key stages: first, prove the technology works, secondly, develop a commercial agreement with an MNO and then, third, deploy the rural network. Stage two proved elusive – Tier 1 operators are reluctant to agree the revenue share percentages or the minute rate we need to make the risk we take in building the infrastructure worthwhile. Demand in rural areas is obvious and no one has met that demand with a commercial solution yet, despite some very innovative tech vendors out there at the moment. This will change however. Technology is evolving at a rapid rate and with some of the new ultra light BTS and VoIP solutions coming on-stream the OTT commercial models get more and more interesting.

TowerXchange: So why aren’t operators rolling into rural areas now?

There are several reasons. Firstly, they don’t see enough of a market there. They see ARPUs of US$1-2 a month and don’t believe it’s worth their investment against ARPUs of US$8-20 in urban areas. However we know from our experience that if you choose the right site you can get ARPUs of US$4+ where people have some cash in their pocket. It won’t be as much as what MNOs are used to in urban areas but is more than many people think and it is enough to justify a small site. Margins won’t be huge but there’s a business there.

MNOs are also working more with the Universal Service Funds (USF). Without USF support MNO’s have a challenge to cover underserved and potentially non-profitable areas particularly when they are focused on the transition to data driven service provision, 2G licence renewals, new 4G licences and legacy 2G and 3G commitments. These distractions mean there is room for specialist rural service providers to fill the underserved gap.

Operators are also understandably wary of giving their brand to new vendor solutions being rolled out by new relatively small businesses. This means we’re left with a situation where operators are unwilling to risk a rural partnership to cover rural areas and underserved communities are therefore left with no service at all - it’s a problem we are working on.

There are a number of ways to address it.  We as the specialists in rural coverage need to up our game and prove to the MNOs that we can deliver by partnering with proven technology and already established telco specialists (towercos, telco engineering specialists, traditional vendors).  Technology evolution is close to delivering network solutions that do not require the current large infrastructure installations we’re all used to.  This makes our initiatives even more feasible though regulators will have a challenge to manage the delicate balance between innovation and stability.

USF supported projects are also finally gaining momentum and, while they should offer an ideal solution to the coverage of underserved areas, it is critical that these projects are managed efficiently, honestly and transparently.

TowerXchange: Tell us about governmental initiatives to improve rural services

There are 23 USFs in Sub Saharan Africa and 13 of these have little or no activity, according to the GSMA USF report. Universal Service Funds levy operators between 2% and 3% of pre-tax revenues to subsidise the establishment of coverage infrastructure  in potentially loss-making underserved areas.  Few countries do this transparently and effectively.  Regulators who are often responsible for these funds are in a difficult position trying to stimulate innovation while simultaneously trying to support the incumbent MNOs who prefer the more traditional vendor solutions. Political pressure also plays a disruptive role particularly when 19 of these funds had US$400 million to disperse in 2011 – a tempting number to keep on treasury’s bottom line.  This number will be significantly higher today but no-one is certain who has what.

It is up to the MNOs, towercos and rural coverage specialists like us to lobby the USFs and encourage the support of innovative coverage solutions, not just stripped down versions of traditional solutions.

A common feeling among operators is that their payment of a USF levy means they have contributed enough to underserved areas and therefore need not do any more.  Another unfortunate consequence of inefficient and ineffective USF deployments is where operators are reluctantly left to manage an inferior rural infrastructure network built by an ineffective fund. This makes it virtually impossible to get a MNO to agree to work with us commercially to extend the rural network even further.

The end result is a stifled rural coverage programme and millions of underserved who don’t deserve to be underserved.

Forward thinking, transparency and a genuine passion to connect the underserved will solve this.

TowerXchange: Do you feel the increasing prevalence of the independent towerco model has changed the market?

Yes, there is a definite shift in the MNO’s attitude to us once a towerco deal has been concluded.  All responsibility is shifted to the towerco and it is difficult for us to determine who the ultimate decision maker is to “go rural”.  The operator is focused on transferring his infrastructure, not building new infrastructure, and the towerco is focused on absorbing the operator’s existing infrastructure and making it work commercially, not on building new infrastructure in less profitable areas.  Some forward thinking and risk acceptance from the MNOs and towercos is required for us to address the immediate needs of the underserved.

The combination of ineffective USF projects, towerco asset transfer deals, outsourced network operations, planned network extension, our non standard vendor solutions and lack of track record all come together to make operators reluctant to consider any kind of rural coverage or innovative network extension.

This situation does however provide the towercos with an unique opportunity to partner with us as a focused specialist to develop and rapidly deploy innovative rural coverage solutions and secure the future (first mover advantage) while they absorb their new assets from the MNOs.

TowerXchange: Once you secure a commitment from an operator, how will you structure the deal?

There are multiple commercial options, revenue share, minute rates, lease agreements and hybrids of them all.

Revenue share is complex as the split we require does not fit with MNO’s traditional understanding of revenue share percentages that evolved in the VAS and App sectors. The definition of “revenue” is difficult to nail down (pre or post marketing/promo) and there is a reluctance to share the CDRs we need to monitor revenues. Tier 2 and Tier 3 Operators are however more receptive to pure revenue share type agreements so there is scope to develop these clients.

Minute rates, while also difficult to negotiate, offer a simpler and more transparent commercial model.  Once a “blended” rate or tariff is established this is applied to all minutes of traffic delivered by our rural network.  This mechanism can be applied in conjunction with a revenue share though it can prove complex. Simplicity is ultimately what we should all want to achieve.  Agreeing a mutually equitable “blended rate” takes time, trust and transparency – elements not traditionally synonymous with the telco sector.

Standard monthly lease agreements are understood and accepted, particularly since the towercos have established themselves so the first purely commercial agreements are likely to be lease driven.

A hybrid of fixed lease to cover capex and a minute rate to cover opex and motivate us to optimise local traffic is a good commercial solution for us currently.

If the USFs worked transparently with the towercos, MNOs and us to deploy effective rural coverage solutions we could all immediately escalate rural coverage and dramatically and rapidly reduce the number of underserved across Africa.

TowerXchange: Can you tell us more about what OTT means for rural services?

The OTT models are revolutionary and very exciting – solar powered planes bringing Wi-Fi to rural Africa may be a crazy idea but Facebook are prepared to think about it. The Google balloon project may also be crazy but it’s focused on an end result - coverage. There are several innovative network solutions being tested around the world and more in development. All of them do not require traditional MNO infrastructure and this will be a threat to the traditional operator model.

Regulators also have a challenge with OTT.  They will have to deal with balancing innovation with the currently stable MNO sector.  The MNO sector will in turn have to adapt to embrace these innovative solutions or risk being bypassed.

The mobile revolution is only beginning.

TowerXchange: How do you see yourselves in relation to the big towercos in Africa?

We are in many ways very similar to a towerco. The main differences are that we serve the least profitable areas, we build new infrastructure networks and we own both the active and the passive infrastructure.  We fill the rural “Middle Market” category.

We can work with towercos and other ‘Middle Market’ specialists who are not yet ready to enter our less profitable market sector.  We do service the only new subscriber/user market left in the world and it has volume plus exponential future potential.  It is only a matter of time before this new market is properly opened and first mover advantage will secure these rural subscribers.  In our view it is an ideal opportunity for an MNO and/or towerco to use us to lock down these communities, build the user base and boost rural ARPUs with our specialised value added services.

TowerXchange: Which markets will you look at next? 

We are currently focused on Southern Africa but have opportunities in Central and East Africa.

For scale the future is West Africa - Nigeria is Africa’s biggest market and the opportunities are immense. Kenya is a very competitive and innovative environment, taking the lead from South Africa in many ways. Tanzania has the least infrastructure and is using their USF to address this. North Africa offers different but well established and sustainable communities.  Conflict areas offer niche markets – Sudan and Somalia are letting some specialist middle market players take the lead. Even small countries like Lesotho and Swaziland have remote areas and opportunities for small cell technology deployment.

Africa as a whole is the fastest growing mobile sector in the world with millions of underserved and thus tremendous potential for us. The trick will be to strategically target the markets where we can deliver the fastest and have most effective impact.

TowerXchange: What new technologies do you find exciting?

The convergence of voice and data is fascinating. It will be interesting to see how the traditional GSM operators submit to data. GSM will be here for decades yet but 4Gs are already starting to link the two together.

GSM to SIP conversion on a commercial scale offers some interesting rural solutions – converting that battered old Nokia into a VoIP phone. Imagine, millions of users connected to the latest low cost data network without having to buy a new phone?

Then there is the “affordable” smart phone that will soon be under US$25. This will herald the large scale introduction of e-learning, e-health, e-commerce, e-agriculture – all elements critical to the future of Africa.

With an average age of under twenty, compared to thirty-five plus in Europe and Asia, the workforce of the world will come from Africa in less than fifty years from now. This means dramatic and fundamental developmental support for the African people needs to be delivered now.

The effective channeling of the mobile revolution can make this happen.

TowerXchange: As well as mobile networks and government, who do you work with?

We will work with anyone who can add value or who we can add value to.  NGOs, the larger Charities and Development Agencies make good partners. We’ve just met with the World Food Programme who are working with the Zambian government to provide a square meal a day to school children in Zambia.

A challenge is to enable routine reporting on the delivery and utilisation of the food using an SMS and App driven monitoring system - which of course won’t work if there’s no coverage. We’re looking at introducing coverage in these areas and we can then use this infrastructure as leverage to extend coverage deeper into rural areas. Similarly with corporates, we can help them with infrastructure in the field while also offering ICT driven enterprise solutions nationally.

Our value added service portfolio includes education, health, energy, agriculture, business, finance and government services.  All of these sectors offer multiple mutually beneficial partnership opportunities and we see opportunity everywhere.

Rural coverage is the first step.